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Money laundering – how vulnerable are you?

11 December, 2018

Stephen Ward, director of strategy & external relations at the Council for Licensed Conveyancers, highlights how property can be vulnerable to money laundering

Quote: “People have bought houses with cash, and somehow some… have not thought that that is remotely suspicious…” Ben Wallace MP, Minister for Security and Economic Crime, 12 September 2018

Fraud, in its many guises, is a scourge of the industry at the moment, with consumers being seen as particularly vulnerable in falling victim to fraudsters when transferring large sums during the property purchasing process.

However, businesses involved in property are also at risk of becoming a target as criminals seek to ‘cleanse’ the proceeds of their crimes. But are too many professionals guilty of thinking that it “wouldn’t happen to me”? When, in reality, criminals are reliant on the skills of professionals to profit from their crimes and are adept at disguising their endeavours to give the illusion of legitimacy.

As those fraudsters become ever more sophisticated in their methods, it is more vital than ever that processes are in place to identify and thwart their attempts to launder their money.

So why is conveyancing at particular risk of money laundering? Conveyancing is a common method for disposing of or converting criminal proceeds due to criminals being able to launder large amounts of money in a single transaction. This is highlighted by the National Crime Agency (NCA) who suggests that in 2016, 50% of legal sector Suspicious Activity Reports (SARs) were linked to property transactions.

Remember that criminals also need somewhere to live and carry out their illegal work. Properties can also be used to launder money by posing as rental properties to ‘wash’ illegitimate funds by disguising the money as rental income. Illegitimate monies may also be used as repayments on a mortgage – a red flag may be large or early repayments.

Identity verification
It’s worth remembering that estate agents, lenders and conveyancers are required to undertake their own checks, one cannot rely on the other’s checks. The legal guidance on this is very clear, and anyone relying on a third party still remains legally responsible for any failure – meaning that reliance itself is a risk, an issue highlighted earlier this year in the Dreamvar ruling.

Even if consumers know they will be asked to verify their identity and the source of their funds, do they really understand why and what it involves? Explaining early in the process why they may be asked multiple times for similar documentation, and being clear as to why, can make transactions move more smoothly saving everybody time.

Not acting on suspicions can have personal consequences for you and for your company with a potential risk of fines and prosecutions if you don’t report suspicions.

You should be aware of any circumstances about a transaction which appear to be unusual or do not make commercial sense. Below we look at how everybody involved in the value chain can better help ensure a smooth process.

Payment type
Cash and some electronic currencies can enable anonymity. The use of cash in a transaction suggests a higher risk, and it is a good idea to have a policy on the amount of cash you will accept and in what circumstances.

There may be legitimate reasons why a client wants to pay in cash or electronic currency, however, this should be considered higher risk because it has not passed through the banking system and is often untraceable.

In-depth checking of source of funds
The source of funds checks, are essential on all matters to be confident that no money laundering is taking place. Areas you may wish to consider include:

  • Has the money come from a UK bank?
  • What if the money comes from overseas?
  • Does it need to be translated?
  • How far do you need to go back?

Suspicious transactions 
Look out for transactions that don’t fit with the practice or client’s normal pattern. If a new or existing client requests services that you don’t usually offer, you might consider it suspicious if there is no obvious reason for the request.

Client account
Lawyers’ client accounts can be used as a way to make illegal monies seem to have a legitimate source. Client accounts must never be used as a banking facility, or to pass funds through without a legitimate underlying legal transaction. It is good practice to withhold details of your client account and not accept any payments until the necessary client due diligence has been completed.

New services, delivery methods or technologies
Criminals might target practices moving into new areas, because of the perception that their anti-money laundering (AML) policies and procedures are new and untested. Criminals might also seek to target loopholes in new technology before they are identified and protected.

Complex transactions
Criminals can use complexity as a way of concealing the source of funds or their ownership. You should make sure that you fully understand the purpose and nature of a transaction – ask for more information or documents if you need to.

Remote clients
Not seeing a client face-to-face increases the risk of identity fraud and may help facilitate anonymity. The risk posed by remote clients can be mitigated by the use of safeguards such as e-verification.

Payments to or from third parties
Criminals may seek to disguise the source of funds by third parties making or receiving payments. This is a way of disguising assets and you should make sure the source of funds and source of wealth are identified and verified.

There may be legitimate reasons for third party payments, for example parents gifting a house deposit. You should ensure you carry out appropriate due diligence on the source of funds and source of wealth and the reason for the payment before accepting funds.

Location of client and beneficial owners
If clients, beneficial owners or third parties are based outside of the UK, you should consider applying enhanced due diligence measures, especially if dealing with countries with significant levels of corruption or other criminal activity.

You should also consider whether you have the skills and expertise to be able to deal with such circumstances.

Regular AML training
You should ensure that regular AML training is conducted and training records are kept to reflect this. This will provide you with the confidence that both you and your members of staff have a good understanding of AML and know what to look out for to ensure that you are acting in compliance.

Conduct several risk assessments 
We believe that it is good practice to conduct several risk assessments during the course of a matter, as this ensures that the risk is considered more than just at the beginning of a matter.

Don’t be afraid 
Never be afraid of what the client might say or think if you ask further questions in regards to AML, especially in regards to source of funds, even if it may sound intrusive.

What can I do?
You can ensure all staff are trained and up to date with the relevant legislation. AML legislation is there to protect you and your practice from unwitting involvement in money laundering and the greater safeguards your practice has in place the lower the risk to you, your practice and ultimately your clients.

This article first appeared in Mortgage Finance Gazette